Four central bank meetings and a budget – SocGen

Research Team at Societe Generale, suggests that it’s going to be a hectic week of G10 central bank meetings, with the Fed being the main focus but also the BoJ, the BoE and the Norges Bank.

Key Quotes

“This week’s FOMC will be accompanied by new economic projections and a press conference. So although we do not expect a Fed rate hike, the pace of projected tightening is likely to be scaled back and there will be new information for the market to chew on.

Meanwhile, the net long yen speculative position appears to be growing. We continue to see upside potential in USD/JPY in the near-term. Risk sentiment has been improving on the back of firmer crude oil prices and CNY stability, and this is likely to continue.

The only central bank that is expected to cut rates is the Norges. Although Norwegian inflation has been creeping higher, the main focus is on supporting growth amid low crude oil prices, and that means keeping the krone weak.

Sterling has had a good run in recent days due to the broad dollar retreat, with EUR/GBP little changed over the past week. The BoE meeting this week will be a non-event, with the UK budget likely to generate greater interest. We continue to see further downside to GBP crosses as we approach the June 23 referendum. Given the expected Norges rate cut, we would look to sell GBP/NOK on a rally to 12.25, targeting 11.50.

An outright short GBP/USD appeals too. Go short GBP/USD at 1.44, with a stop at 1.47 and targeting 1.39. The ceiling of the down channel from December is located just above 1.44.

For those looking for a hedge against Brexit, we recommend a calendar put structure where you Buy a GBP/USD 4m put, strike 1.32, and Sell GBP/USD a 3m put, strike 1.32 (indicative offer 0.70%). The risk of the calendar put structure is limited to the premium paid up to three months (expiry of the short option). Investors could face unlimited downside risk if GBP/USD traded below the 1.32 strike at the 3m intermediate expiry. If GBP/USD also trades above it at the 4m final expiry, the long option would be out of the money, realising the loss incurred one month earlier on the short option.”
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